In Chancellor v. Commissioner, the United States Tax Court sustained the Commissioner of Internal Revenue’s decision to disallow deductions claimed by the taxpayer for business expenses, charitable contributions and State and local tax and refused to apply the Cohan rule to its analysis.


Viola Chancellor worked as a notary and paralegal in 2015 and reported Federal income tax of $252 for that year, based upon taxable income of $39,694, itemized deductions of $14,339 and a business loss of $18,850. The IRS disallowed her claimed deductions for charitable contributions, State and local tax and business expenses because she failed to establish that they were paid during the taxable year or that they were ordinary and necessary to her business. The IRS sent her a timely notice of deficiency in the amount of $3,521.


When deductions are in dispute, the taxpayer must satisfy the specific requirements for any deduction claimed. A taxpayer must maintain records sufficient to substantiate items underlying her claimed deductions. The failure to do so counts heavily against the taxpayer’s attempted proof. If a taxpayer’s records are lost or destroyed through circumstances beyond her control, she may substantiate expenses through reasonable construction, including her own testimony, but such secondary evidence must be credible.
The taxpayer’s claimed deductions are distinguished as follows:

Charitable Contributions

A taxpayer may deduct any contribution made within the taxable year to a donee organization described in Section 170(c) so long as the taxpayer satisfies certain statutory and regulatory substantiation requirements. For contributions of cash, check or other monetary gift, a donor must maintain a bank record or written communication from the donee showing the name of the organization and the date and amount of the contribution.
Ms. Chancellor claimed a charitable contribution deduction of $6,000 in cash contributions and $500 in expenditures for volunteer work for her church. She failed to substantiate either and merely testified that she “had people that I was charitable to” with respect to money, including “helping with my family.” Thus, the Tax Court sustained the Commissioner’s finding that she is not entitled to the charitable contribution deduction claimed on her 2015 tax return.

State and Local Tax

Taxpayers who use itemized deductions may deduct for State and local income taxes paid during the taxable year, pursuant to Section 164. Taxpayers may also deduct State and local general sales taxes in lieu of State and local income taxes. Here, Ms. Chancellor claimed a State and local tax deduction of $4,500 and testified that she paid sales tax when replacing certain items that had been stolen, but she failed to substantiate the actual amount of sales tax paid. The Commissioner and Tax Court found that she is entitled to a deduction for general sales tax based on the IRS’s Optional State and Certain Local Sales Tax Tables, which taxpayers may use to calculate the deduction.

Business Expenses

Taxpayers may deduct “all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. Section 162(a). For Section 274(d) expenses related to travel, meals, lodging, entertainment, gifts and “listed property,” the taxpayer must substantiate the amount, time and place, business purpose and business relationship of the person receiving the benefit with adequate records or evidence corroborating the taxpayer’s own statements.

Ms. Chancellor testified that she conducted business as a notary and paralegal in 2015, received $400 and reported $19,250 in business expenses. Meals comprised a portion of her claimed expenses. She testified that at such meals she “talked strategies” with friends and people who “wanted her to do some work” but she failed to provide adequate records or other sufficient evidence corroborating her testimony as to the business purpose. Ms. Chancellor also alleged car and truck expenses of $12,600 and testified that she determined her business mileage by comparing the odometer readings on her car at the beginning and end of the year and “kind of like subtract from that.” She did not substantiate the amount of business mileage and the date and purpose of each use. For these matters, the Tax Court sustained the Commissioner’s conclusion that the evidence falls short of the substantiation required by Section 274(d).

Ms. Chancellor also reported expenses not subject to Section 274(d) requirements, including utilities, legal and professional services, advertising. She testified that her utilities expenses of $920 were a result of her living with her son and using part of her bedroom as a workspace. She did not claim a home office deduction nor introduce evidence that any part of her bedroom was “exclusively used on a regular basis” for the conduct of her business.” She further testified that she incurred legal and professional expenses in connection with the probate process for her deceased brother’s estate but she failed to provide evidence showing that these expenses “had a reasonably direct relationship to [her] trade or business.” She also testified that she purchased business cards in 2015 and that she had “something that was on the internet that could help promote” her business, but she did not offer corroborating evidence. Thus, the Tax Court again sustained the Commissioner’s disallowance of these deductions.

Ms. Chancellor alleged that she lacked substantiation for these expenses because her business records were stolen in 2017. She asked the Court to apply the “Cohan rule,” under which a court may in some instances estimate the allowable deduction where a taxpayer establishes that she paid a deductible expense but does not establish the precise amount. A court may not apply the Cohan rule to approximate expenses covered by Section 274(d). If a taxpayer alleges that her records were lost, she must reasonably reconstruct the missing records through contacts with third parties and other reasonable means.

The Commissioner refused to apply the Cohan rule because Ms. Chancellor failed to reasonably reconstruct her stolen business records and the evidence she provided showed a mixture of personal and potential business expenses with no distinguishing between the two.


The Tax Court’s decision that the taxpayer failed to prove her entitlement to her claimed business expense and itemized deductions is based upon her lack of credible corroborating evidence and her failed attempt to persuade the Court to use the Cohan rule in analyzing the claimed deductions.

Frank Baldino is an estates and trusts attorney who helps people throughout the greater Washington, DC area protect assets for their families and future generations through careful estate tax planning. For more information, contact Frank at (301) 657-0175 or [email protected].